TThe Great Debate on Pensions 2000/2001
In response to the pre-budget report of November 2000, I wrote an article entitled Restore the Link for Pensions Management magazine (please click on title for text).
Last year (2000) an article I wrote on pensions which was published in Tribune with a shorter version in Pensions Management illicited a response from the Pensions Minister, Jeff Rooker. My own letter in response and another reader's letter are posted below.
WHY THE GOVERNMENT SHOULD THINK AGAIN ON PENSIONS
by Lynne Jones - January 2000
The Government says it wants to reduce the number of pensioners who, even after a lifetime's work, currently have to rely on means-tested benefits. The plan is to phase out SERPS and introduce a new State Second Pension (S2P) which will be twice as generous to those with incomes below a Lower Earnings Threshold (£9,500 at present value) thus giving more help to low earners for whom private second pensions are not seen as an option. Initially, those with higher incomes who are not contracted out of SERPS because they have an occupational or other approved private pension, will not be worse off under the new arrangements but within a few years the second pension will become flat rate whilst contracted out rebates will remain earnings-linked. In this way, the Government will encourage moderate earners to opt for private pensions. Government approved Stakeholder Pensions with a maximum 1% administration fee are being put forward as a better bet than discredited private pensions which have no such limit. Even so, a 1% charging regime eats up 25% of the pension fund.
The State Second Pension has been promoted as a replacement for SERPS that will eventually double the benefits of low earners. Particularly welcomed has been the proposal to provide contribution credits to those with interruptions in their working life because of disability or full-time caring responsibilities.
In reality, however, the new state pension does little more than start to fill the gap left by a shrinking Basic State Pension (BSP) and the much-lauded help for carers actually has less coverage than the Home Responsibilities Protection for the basic scheme. It does not therefore justify or compensate for the abolition of SERPS and should, more accurately, be seen as a replacement for the indexation to earnings of the BSP.
Projections by the Pension Provisions Group of experts, appointed by the Government to advise on pensions policy, show that both state pensions combined will not provide the same proportion of average earnings, over 20%, that was provided by the basic pension alone before the Tories abolished the earnings link. The lack of ambition in the pension reform plans for those that the Government says it most wants to help is clearly illustrated by the example given in last September's DSS publication "Opportunities for All" of a man earning wages of £300 a week which rise in line with average earnings for his working life of 46 years. The Government says that, when he retires at 65 in 2051, he will be the equivalent of £15 better off. In reality, he is unlikely to achieve an unbroken work record and so would probably receive much less than even this small sum.
On present proposals in the Pensions Bill currently being debated in Parliament, there is little chance of the Government achieving its aim of reducing pensioners' reliance on means-tested benefit. Ironically, the welcome decision to increase the level of income support for pensioners (redesignated as the Minimum Income Guarantee or MIG) and to aim to index annual increases to earnings rather than prices, compounds the problem.
In a written Parliamentary Question, I was told by the Pensions Minister that, assuming earnings continue to grow at 1½% faster than prices, it will not be until 2038 that everyone who has worked and contributed throughout a 49 year working life will receive a combined state pension above the level of the Minimum Income Guarantee. Even after all that time, the achievement is likely to be short-lived as indexation will be pegged to prices whilst the intention is that means-tested benefits will rise at the same rate as earnings, Our man in the example given above would soon be no better off than had he relied on Income Support. The Pensions Provision Group comments "Many of today's adults of working age will have to rely on means-tested benefits in retirement to a greater extent than today's pensioners".
Despite the fact that the majority of respondents to Government consultations on pensions want to see the BSP increased to at least the level of income support, so far the Government is maintaining the nonsensical position that our manifesto commitment to retain the basic pension as "the foundation of pension provision" can be honoured whilst sitting idly by allowing that foundation to erode away. Thanks to pressure from groups like Age Concern and the Pensioners' Convention, ministers are clearly conscious of charges that they are not doing enough for today's pensioners, hence the winter fuel addition and the free TV licences for the over 75s. But these one-off additions will do nothing to reduce dependence of future pensioners on means-tested benefits. Furthermore, the continued reliance on means-testing will discourage those on fairly modest incomes from saving and investing in funded pensions because they will be little or no better off than had they relied on the State.
Research carried out both by Nat West and Pearl on attitudes of unskilled and semi-skilled workers shows how difficult it will be to persuade modest earners in the £9,500 to £21,500 target band to put their hard-earned money into a pension scheme without a guarantee as to the final outcome. The Institute of Fiscal Studies, amongst others, have questioned the wisdom of the Government pushing such people towards personal pensions when they would be better advised to put any savings into other assets which would be disregarded when assessing entitlement to benefits. Who, they ask, would be liable if a selected provider of a stakeholder turned out to have a poor performance? As Watson Wyatt have pointed out, the State could end up paying generous rebates, costing far more than S2P foregone, and then find itself paying out a second time in income support through the Minimum Income Guarantee.
It is now becoming obvious that if the Government wants its reforms to last, it must increase the basic pension to at least the level of the MIG. This would cost about £2 billion extra but is affordable, given the £5 billion surplus in the National Insurance fund.
The Government must also take urgent advice on measures to simplify the arrangements for second pensions which are now horrendously more complex than even the system they are to replace. The only guarantee that successive governments will maintain any system is that beneficiaries understand it.
Many in the Labour Party still believe that revitalisation of SERPS, perhaps administered by independent trustees to stop future Governments watering it down again, with annual statements explaining entitlements and credits for carers, would have been the best means of assisting those with intermittent work patterns or frequent job changes. The burden of a growing ageing population on future generations is overstated, given the growth in productivity of the younger workforce that the Government says it is determined to improve upon. Also, for reasons explained above, the cost is likely to be less than the additional £16.5 billion a year the Government projects for the new second pension and enhanced contracting out rebates, let alone the cost of income support if stakeholder pensions fail to perform.
SERPS, combined with a basic pension that retains its value, has also been a sure foundation for the development of all that is good in private sector pensions in this Country. In contrast, there is a real worry amongst pension providers, backed up by the CBI, that the overall effect of the changes will be a lessening of pensions provision rather than an increase. If this happens, the industry has only itself to blame. Anticipating extra business when they thought stakeholder pensions would be made compulsory, they failed to defend SERPS. Its abolition now seems inevitable despite a manifesto commitment to retain it. Efforts must now be directed in support of a decent basic state pension.
SENSE IN RETIREMENT
by Jeff Rooker, Minister of State for Social Security (March 2000)
From Tribune, 10 March 2000
IN HER article on pension reform (Tribune, February 4), my colleague Lynne Jones comes out very strongly in favour of solving pensioner poverty by retaining the very policies that caused the mess in thefirst place. She advocates keeping SERPS unchanged, even though maintaining this scheme in its current form would see the incomes of poorer pensioners falling further behind average earnings.
She also ignores the extra help the Government is giving to carers through the second state pension. Then, she suggests that upping the basic state pension to the level of the minimum income guaranteeing is the best way of helping BritainÕs poorest pensioners which, frankly, makes no sense whatsoever.
Pensioners eligible for MIG already get a guaranteed income of £75 a week. So, how exactly does increasing the basic state pension to £75 for everyone, at a cost of £4.9 billion in the first year alone, not the £2 billion stated by Lynne Jones, make these poorer pensioners better off?
She seems to be saying that we should not be fixing what is not broken, ignoring the fact that the pension policies she refers to in her article simply have not worked for large sections of the population. Under the old way of doing things, someone who retired in 2051 after a lifetime of getting a salary of £180 a week could expect to get a total state pension, combining basic entitlement with SERPS, equal to 14 per cent of average earnings. If this person happened to earn less than £180 a week, or was a carer or disabled person with a broken work record, they would be entitled to even less. Under the state second pension, that personÕs total state pension would be worth around 21 per cent of contemporary average earnings, an increase of 7 per cent.
Of course, it will take some time for these new pension entitlements to build up. Rome was not built in a day and new, improved pension entitlements do not magically appear overnight. That is why, in the meantime, we have introduced the MIG to provide today's poorer pensioners with a basic decent standard of living. Of course, we want as many people as possible to beat the MIG in the future. That is why we are introducing the state second pension and stakeholder pension schemes, the latter aimed at improving the pension options available to moderate earners. But until they begin to bear fruit, the MIG is the best way of getting money to those pensioners who need it the most.
Also, Lynne Jones's assertion that it will be difficult to persuade low and moderate earners to pay money in to stakeholder pensions does not accord with our research. We know that money is tight for many people on low to moderate incomes, but we also know that when they are given the right incentives to save toward their retirement, the majority do manage to put money aside.
The Government is not in the business of replacing policies that are working. Nor is it interested in sticking-plaster policies that deal with the short-term symptoms of pensioner poverty without tackling the underlying causes. Pension reforms have been designed to get to the heart of the matter and we are confident that once fully implemented, they will go a long way to attack the pensioner poverty Labour inherited. We cannot do this if we continue myths such as the basic state pension has always been enough to live on or that SERPS solved all problems. That is why the reforms are essential.
* Jeff Rooker is Minister of State for Social Security and Labour MP for Birmingham Perry Bar.
RE: SENSE IN RETIREMENT
by Lynne Jones
To the Letters Editor - Tribune
Jeff Rooker (10 March 2000) says that by 2051 a person who retires after a lifetime working on a salary of £180 a week will get a total state pension worth around 21% of contemporary average earnings. Big deal! That's less than provided by the basic state pension without SERPS back in 1980. Thus, perhaps unintentionally, Jeff reinforces my point that the State 2nd Pension is actually a means of compensating for the erosion in value of the basic state pension. Unlike the Minister, I do not consider 21% of average earnings to be a satisfactory pension for people retiring in the middle of the 21st Century.
Jeff also says that "given the right incentive" low and moderate earners will manage to put money aside for a Stakeholder pension. But what incentive is the Government giving to such people when they will actually be no better off than had they relied on income support? Stakeholder pensions will, instead, attract affluent people, not in work, who will take advantage of generous tax allowances not otherwise available.
PENSIONS A CASE TO ANSWER
by Tony Lynnes - Tribune Reader
To the Letters Editor - Tribune
RE: Pensions: a case to answer
Lynne Jones (Tribune, 4 February 2000) wrote a well-researched and well-argued article on pensions policy. Jeff Rooker's attempt to rubbish it (Tribune, March 10) is based on a series of misrepresentations. Lynne Jones, says Rooker, "advocates keeping SERPS unchanged". Wrong. What she actually wrote was "Many still believe that revitalisation of SERPS ... would have been the best means of assisting those with intermittent work patterns or frequent job changes." But she also wrote "Its abolition now seems inevitable despite a manifesto commitment to retain it."
Lynne Jones, says Rooker, "ignores the extra help the Government is giving to carers through the second state pension". Wrong. This proposal, she wrote, had been "particularly welcomed" - though she also noted that it compared unfavourably with the protection of carers' entitlement to the basic state pension. Lynne Jones, says Rooker, "suggests that upping the basic state pension to the level of the minimum income guarantee is the best way of helping Britain's poorest pensioners, which makes no sense whatsoever." What she actually wrote was that most respondents to Government consultations wanted such an increase. She did not suggest that it was the best way of helping the poorest pensioners - but, if she had, it would have made very good sense, since the poorest pensioners are the estimated 700,000 poorest pensioners who are entitled to but not receiving the minimum income guarantee.
Finally, Rooker accuses Lynne Jones of "ignoring the fact that the policies she refers to simply have not worked for large sections of the population". On the contrary, the whole point of Lynne Jones's article was that present policies, including the continued erosion of the basic pension, are lamentably failing and that the Government's proposals will not achieve their stated aim of reducing future pensioners' dependence on means-tested benefits. She deserves a serious response.
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